Capital One Financial is having a falling-out with the world's largest retailer, but analysts say the financial impact of potentially losing its Walmart credit card partnership is manageable.
Walmart is seeking an early end to its roughly four-year-old partnership with Capital One. In a lawsuit filed Friday, the retail giant said the bank "was consistently unable to meet" the customer service standards both companies had agreed to, and that the contract should be terminated.
Capital One disputed the allegations, saying that it will "vigorously defend" itself in court, and that any issues were "immaterial" and did not lead to customer harm. The McLean, Virginia-based bank said Walmart is seeking to renegotiate the terms of its agreement or end that deal prematurely.
The legal battle over the $8.3 billion card portfolio will likely take months to play out, but Capital One could compensate by landing new credit card partnerships or cutting back on marketing expenses, analysts said.
"It's never ideal losing a partner," said Sanjay Sakhrani, an analyst at Keefe, Bruyette & Woods who covers the $445 billion-asset Capital One. But losing the Walmart partnership would not have a "material impact" on the company, according to Sakhrani. Walmart only accounts for about 3% of Capital One's earnings, and there are ways to offset the partnership's potential demise, he said.
John Hecht, a Jefferies analyst who also covers Capital One, wrote in a note to clients that he sees "little, if any, impact to earnings over time." The bank may be able to offset much of the hit by using the freed-up capital to buy back shares and boost its earnings, Hecht wrote.
A lawsuit involving Walmart and its credit card partner is nothing new. Capital One
Walmart also has its own ambitions in offering financial services, including through the
Whatever the outcome of the Capital One case, its impact is unlikely to be immediate. In a securities filing, Capital One said if a court agrees with Walmart that it can end the credit card partnership early, a transfer to a new issuer would likely not occur until at least January 2025. Capital One would also receive money from either Walmart or whatever company issues the retail giant's new card to purchase the existing credit card portfolio, the bank said.
In the meantime, Walmart said in a statement, cardholders should "should not experience any disruptions in service" and can keep using their Capital One Walmart credit cards.
"We look forward to bringing our customers a new credit card option that provides meaningful benefits and rewards soon," Walmart said in an emailed statement, adding that it decided to end the partnership "due to Capital One's failure to meet a number of contractual obligations."
In its lawsuit, which was filed in U.S. District Court in the Southern District of New York, Walmart said the contract specifies that if Capital One falls short on critical service standards five times in a year, the retailer can end the agreement. The alleged shortcomings happened in payment processing, card issuance and the posting of transactions — the first of which allegedly occurred three times — according to the lawsuit.
In a statement, a Capital One spokesperson said the "servicing issues were immaterial and cured by Capital One pursuant to the terms of the agreement, without harm to customers, the program, or Walmart."
"Capital One disputes that Walmart has any right to change the terms of the existing partnership mid-stream, and we will vigorously protect our contractual rights in court," the spokesperson said.
The bank also said it's "developed a leading credit card product for Walmart and its customers, and is proud of the value that we've delivered to both."
